Investors have long struggled with the problem of how they should invest their savings. The public securities markets allow investors to buy and sell securities, but in the past the general public generally has been at a disadvantage to professional brokers and securities traders, in that individuals and other non-institutional investors did not have the information and other resources needed to be competitive in the market. More recently, with the improvement in computers and networks, it has been possible for retail investors to obtain information and access to the markets that they previously did not. Still, managing investments has become ever more complicated, with many different sorts of securities available for investment.
One investment vehicle available to retail investors is the publicly registered mutual fund. Mutual funds allow investors to collect their investment money in one fund that is under the direction of a professional manager. The professional manager hopefully can spend the time, and has the ability, to effectively manage the fund that is entrusted to her. One disadvantage of mutual funds is that they can become large and unwieldy. Fund managers are paid as a percentage of funds under management, and so there is an incentive for the managers to grow the funds as large as possible. This may not be to the investor's benefit, because an investment strategy that was profitable for a fund of $200 million, for example, may not be nearly as profitable when the fund has $2 billion under management, because a change in position will be noticed by the market. Mutual funds can be expensive investments because of the high management fees.
Unregistered investment vehicles (often referred to as “hedge funds”) are another offering that allow certain investors to put their investment money into one fund. Hedge funds have the promise of allowing an investor to have his investments professionally managed without some of the disadvantages of mutual funds. For one thing, because they are unregistered and often smaller, the market is less likely to notice a change in an investment position. Hedge funds also can engage in riskier strategies that have the prospect of yielding higher returns. Yet, hedge funds are also expensive investments because of the management fees, and not all investors can participate, due to limitations in financial status. It is also very difficult to compare the performance and strategy of various hedge funds.
While many still believe that a talented individual, either alone or with analytical aids such as computers, can do better than the market on average, a need still exists for an investment vehicle that allows an investor to make informed investment choices while having access to talented investment advisors.